8 Ways to Help Prevent Bloat in Your Runway Budget

When companies overestimate their runways and underestimate their costs, they can fail. These tips can help keep your budget in balance.
August 25, 2016

One of the greatest challenges new entrepreneurs face is maximizing runways. You have limited funds to achieve traction in a short amount of time. It's a thrill and a challenge—and it's often why so many startups fail in their early stages.

When I founded my company, my team and I considered budget allocation to be especially challenging. We cater to affluent users, which is an elusive demographic that prefers to remain secretive and unreachable. We had to adapt our strategies quickly using metrics, relying on industry partners to determine our next direction.

The runway question always loomed overhead. As a software engineer, I know to pad development timelines by 20 percent or more, and I apply the same mentality to budgeting. I can estimate tech costs with great accuracy, but marketing, legal and administrative expenses are harder to project. Many entrepreneurs fail to make room for unexpected items because they overestimate their runways and underestimate their costs.

Here are eight ways to help avoid making those mistakes with your company:

1. Solicit feedback. 

Building a concept without researching whether there's a need for it can waste hundreds of thousands of dollars. Seek customer feedback early and often to confirm that people will buy and use your product.

2. Hire slow.

Remember that you probably don't have to hire a full staff right away. You might be better off contracting freelance developers and creatives until you can afford full-time employees. You'll save money because you don't have to provide insurance or cover overhead expenses for contractors, and you can test their skills for relatively minimal investment.

3. Fire fast. 

Retain only those employees who deliver value to your bottom line. Once you realize someone isn't performing as well as expected, consider cutting the fat and move on. As difficult as those decisions are, you need to think about the business. If your company fails, all of your employees suffer, so focus on the collective good.

4. Write a contingency budget. 

Create two versions of your budget—one to follow if funding, traction and growth occur as expected and one as a barebones, worst-case-scenario plan. The latter will steer you through turbulent quarters when you need to pivot and get back to fundraising.

5. Maintain a profit-and-loss statement.

You might allot $2,000 a month for rent, $500 for utilities, and $5,000 for staff. But you never spend those exact amounts, so you could make yourself vulnerable if you don't track them. You may suddenly run out of runway and find that you can't keep the lights on because you spent 20 percent more on electricity than you budgeted. This type of mistake often sinks companies.

6. Track where every dollar is going—and why. 

Blindly spending on marketing and advertising can waste considerable money. That strategy may bring in a broad range of initial users, but the majority probably has no need for your product or service. Assess the time, resources and dollar amounts of your campaigns, and make sure you're allocating for maximum effectiveness.

7. Delegate. 

Examine your skill set, and determine how those skills align with your day-to-day responsibilities. Chances are you can offload at least some tasks so that you can focus on your core competencies. There's probably one thing you excel at, so build your schedule around that. If your strength lies in, say, architecting the platform, delegate contract reviews, scheduling and project management to your team members.

8. Leverage your allies and advisers. 

I have friends who run major firms and investment funds who are willing to look at our budgets and plans. A 10-second glance may be all it takes to recognize a lopsided budget and save my team from bad decisions. Stack your board with smart people from diverse backgrounds, and draw on their expertise when making big decisions.

If you don't come from a sales background, consider working with a co-founder whose skill set complements your own. If you're a tech founder who doesn't have sales acumen, a sales-savvy partner can help ensure your company's success.

Don't take money for granted, no matter how flush you are in early funding rounds. Remember that the landscape can change at any moment; this forces you to be mindful in your spending, and it creates a healthy foundation for your startup's future.

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